Systems Under Development Best Practices Symposium

Where are We Going?

Peter Greis

Peter S. Greis is currently Director of the Strategic Consulting Group in the NCR Corporation. The primary responsibilities of the Strategic Consulting Group are to research the relationship between information technology investments and business objectives.

Mr. Greis joined NCR in 1980 as a Product Manager, General Purpose Systems D&P Division. He was a key member of the initial project team that developed the NCR Tower family of UNIX-based systems. Mr. Greis has also served as Director in Strategic Marketing responsible for developing NCR's company-level marketing themes and providing marketing tools to NCR's management and sales force.

I think it's important, in starting off, to illustrate where we are right now. Certainly all of us involved in the technology sector know there's a lot of new technology. Anybody that spends any time trying to keep up with the technology recognizes that that's nearly impossible.

We also know that the cost of entry has been decreasing, so, what used to be a major acquisition now can be purchased at much lower levels. That is because we have much less expensive technology. At the same time, many people feel, we have too much technology. Those of you involved in selection of technology recognize that it's a constantly moving target. What's the current standard? Which is the standard that's going to evolve to dominate? Which suppliers are going to be around next year?

We also recognize that, while we have a lower cost of entry in terms of less expensive technology, all our budgets are going up. There seems to be a bit of a contradiction here and, I think, this reflects the situation we're in today.

I'd like to discuss what I think are some of the problems, and focus on two of the three that I'll mention here. First (I think we talked about this earlier) is how we make investments in technology, and what is changing in that area. Certainly we made decisions on investments for many years, but a number of factors are changing the way we look at those investments. I'll go into that a little later.

The second part—I'll talk about this briefly at the end—is how we manage our information systems organizations. I think, in many cases, we've put together organization and management philosophies, decision making processes and responsibilities that reflect the way technology used to look many years ago.

Of course, the last part—and Andy referred to this as well—is the notion of legacy systems. That is the old infrastructure we have in place today, which makes it much more difficult to move to some of these new and more appealing technologies. I'm not going to spend any time on that; I'll focus on the first two areas here.

We've been involved, over the last two years, in research in the area of how you make IT investments, and how you determine the value of those investments so that you can make correct decisions. We've also noticed that the whole notion of measuring the business value of IT investments today is being complicated. This is not something new. We've always been making decisions on investments as long as technology has been available for our organizations. But this issue is becoming more complicated, for three reasons.

The first one is the complexity and magnitude of the investments. We have much more complex systems—in many cases we're building much larger systems—because we're all looking at the notion of enterprise-wide computing whether the enterprise is our organization or department, or whether it is the entire government. So, when we look at things such as corporate infrastructure, or infrastructure investments—things that connect many different organizations—it becomes more difficult to determine the value of those investments and understand when the paybacks are going to come.

The same applies when we build systems that cross organizational boundaries. There is a lot of appeal to that, but often it's more difficult to assess the value. Each organization may have its own measurement techniques, its own goals—and how do you account for that when you put together cross-functional systems that change the way multiple organizations work?

At the same time, as we heard earlier, the people that are involved in making those decisions are interested in understanding the linkage between this investment and the objectives of my organization. So, the focus is increasing on business and on value, and decreasing on the details of the technology features and functions.

The third point is something I've observed, and that is that many of the financial measurement techniques we've used to decide what kinds of investments to make are really not adequate for capturing the true business value—the true benefits that we're going to get from some of these technology investments. A gentleman from the University of Virginia said this at a conference some time ago, and I think it really captures the essence of what we're talking about: measuring the business value of IT is a problem that won't go away. It's not something we can sweep underneath the rug. Many people are convinced of the great potential that technology has, but few people seem to be able to justify—or document, for that matter—the benefits to the satisfaction of those people that are looking at those investments: the board members, administrators and controllers. So, we're having a tough time doing this.

I think the problem really is the result of two things. The first one is that many of the approaches that we have used in the past for measuring IT value—those things that we put together when we were attempting to justify an investment—are really insufficient. An old report from the Diebold Group commented that techniques such as discounted cash flow and return-on-investment approaches are no longer solely adequate for evaluating investments and advanced information systems. The key term here is "solely adequate". It isn't that they're wrong; it's just that, in many cases, it's very difficult to capture the true benefit, if you confine yourself to some simple measurements.

The other point is that, in many cases, the fundamental business measurement systems that we use to measure the effectiveness of our organizations are inadequate. It is certainly true in the private sector that people are beginning to recognize that the financially focussed annual reports that we put together really don't capture the true health of an organization and the true potential of where that organization is going.

We have to recognize, however, that we are still interested fundamentally in analysing IT investments in terms of the business value that they create. Services are the principal goals of governments. And we're interested in two elements of that: we want to make sure we provide the highest quality service at the lowest cost. Pretty simple. But the problem is that, many times, the financial performance measures that we're using to determine whether we have investments that support those elements are not necessarily the best choices to guide our decision making when we're trying to determine what investments to make, especially in information technology.

You have to look at this chart as a sort of "top and bottom" perspective. The top perspective is a simple view of how we look at investments. There's a cash inflow—the money that we invest in that particular system. We expect some kind of cash outflow. In most cases we're expecting to reduce the cost of our operation by making an investment in a system that will make us operate better.

In fact, I think the bottom perspective is a better description of what we're doing. It's not simply an investment in information technology, it's investment in people. Andy referred to that earlier. And there are other investments that are all linked. This is especially true when we're looking at things such as redesigning our processes. We're not simply layering on new systems, we're changing the way people work. We may even be changing the way we train them.

What we're really focusing on, where all those things come together, is developing a set of capabilities a combination skills of the people in our organization, a set of systems and a set of processes that make us achieve our goals as an organization. When you look at those kinds of things, most of the measurement techniques for determining whether you're headed in the right direction are, in fact, non-financial measures. So, when you're looking at the skills of your people, how do you determine that you have the right level of training for everyone? How do you determine that your processes are efficient and effective? Are you looking at the cycle time of your process—the time it takes from when something hits someone's desk to the time the result is produced?

All those kinds of measures are, in fact, non-financial measures because we're focusing on how we maximize those measures to improve our effectiveness and increase our efficiency. Our ultimate goal is having satisfied customers: the constituents and the members of our organization.

There's another wrinkle in IT assessment. We have begun to see the emergence of new applications for technology. I place them in two areas.

One of them I call business automation (I think that term has been used before), or automating. That's a traditional way we looked at information technology. It was focused on supporting and improving our business processes. For the most part in the past, it is focused on eliminating manual labour. I mean, that was the whole reason for employing information technology for many years.

Now, of course, we've moved beyond that in terms of looking at automation. We're focused on improving the quality of our processes. This whole notion of automation is now tied to process improvement and re-engineering with technology as an enabler. So, our goal today is not only cost reduction, but it's also cycle time reduction and quality improvement.

But there's a whole other sector of technology implementation emerging. Maybe it has always been there, and we have just begun to exploit it. That is "informating". I'm taking that word from a woman named Shoshana Zuboff, who wrote a book called "In the age of the smart machine: The Future of Work and Power ". This is where we look at using information to make our organizations more effective. In the conduct of our business, in running our organizations, we generate a lot of information. The question is whether we are using this information effectively to improve our business and to serve our customers.

We've begun to see a focus on effective information management. This is tied to providing information to the decision makers, on how the business is operating, how our customers are behaving and how, if we're looking at the private sector, the marketplace is behaving and competition is behaving. We're using this as a sort of instrument panel to tell us where we're going with our organization.

Our goal here, if we look at the private sector, is to focus on how we can achieve a competitive advantage. How can we "grow" the business and improve customer satisfaction by using the information that is generated in the process of running the business to make ourselves more effective?

Let me now move to a discussion on approaches to evaluating IT investments. In the traditional view of things, we most often focused on simple financial measures. But the primary focus has been on short-term cost displacement or cost avoidance. In many cases, we're making decisions between various implementations. We're saying, "Is this more cost-effective than another implementation? Is this particular IT supplier more cost-effective than this other one?"

As you can see, this is a very simple view of things. Not that any of these techniques is incorrect; it's that, most often, to get a broad perspective you have to make a lot of assumptions. And so, as you move into a long-term evaluation of your investment, some of these things fall short.

We observed that many organizations were beginning to supplant financial measures with other measures. I'm going to talk about these things through the rest of my presentation.

The first area is an operational perspective on the value of IT, and most often, that is focused on the process. One area that I'm going to talk about is the notion of cost of quality as a way to analyse the value you're getting from your IT investments. Then I'll talk about another technique, called work value analysis.

From a strategic perspective, there are really three elements to looking at the value of an investment in a system. They are: 1) Does it support my strategic capabilities? 2) Is it aligned with my business objectives? 3) Can I look at this investment as a positioning investment? Is it an infrastructure investment that will allow me to improve and grow, and to serve my constituency in the future? Can I look at this as providing options for the future?

Let me talk about cost of quality. We say to ourselves, "We have a particular business process that produces so much work—output, if you will—for a certain cost." We can now take a look at all the resources in that particular business process and say that a certain group of them actually produce real output: "essential first-time work".

Then there are tests that we perform that fall into three other groups, and they're all called cost of quality. They're essentially things that we do to ensure that we have a high-quality output—an output of our process that meets our customer's expectation.

The first group is something called "prevention cost". Those are all the things that we do to prevent errors from occurring in the output of the process.

Then there are "appraisal costs". That's all the checking you do. If you think about your business processes and where checking occurs, when someone is looking over a document or calling someone up to make sure that they have the right information or that things are correct, that's an appraisal. It adds no value to the output.

And finally, the worst one is anything that we do to rework—anything that we do to compensate for failure. If there's an error in a document and we have to correct it, that adds no value. That's a "failure cost".

What we're suggesting is that, in looking at our processes, and looking at the task, put them into those four groups. Our goal then, is to increase the essential first-time work to improve the quality and the profit—if you will, to manage by more prevention—because we know from a lot of work that people have done that $1 you invest in prevention is worth $10 that you may incur in appraisal, rework and failure. So, the objective is to reduce the overall cost of operating this process.

The strategy, once you understand each of the various tasks or steps in this process and where it fits, is to see how information technology can be applied to reducing those costs. How can you apply information technology to help make prevention investments? If you capture information the first time correctly, as opposed to moving it in paper form through various steps, can you reduce the number of errors that you would otherwise have to catch and correct later? Can you reduce the cost of that? This is a simple way of looking at measuring the value of IT in terms of a business process.

Several organizations that we talked to were trying to understand how to look at professional office activities that did not lend themselves so easily to a process view. And so, they've been using a technique called work value analysis, which was developed at Georgia Tech in Atlanta, Georgia. It's an office productivity modelling and measuring technique, and it looks at an office or small organization to help understand how the output and the productivity of that office or organization is affected by the staffing mix.

In other words, the various kinds of people we have in the organization we categorize as managerial, professional, and administrative support; what they are responsible for doing in that office; and the kind of technology they employ. Very simply, this is to understand the kinds of people you have in the office.

For example, you will have people at different levels, and you have different numbers of those people in a particular office—say, the branch office of the bank. And then, you ask how they spend their time.

If there's an individual—a professional, let's say—doing administrative work that could be delegated to somebody in administrative support, then that person is doing lower-valued work because you're paying for professional work. It could be a loan officer doing administrative tasks that could be given to an administrative support person. Then, the officer is doing lower-valued work and you're wasting money in that organization.

What you quickly discover when you do this analysis is that you can change the mix of people and, in fact, reduce the overall cost of this office by having the right balance of professional, administrative support and managerial people, as well as by employing information technology to support reducing some of the administrative and non-productive tasks. This is one way of looking at the overall cost of an organization and, by manipulating the staffing mix and the technology, reducing the cost of that operation.

I said earlier that I would talk about the concept of strategic capability. This is a core concept that is emerging now as organizations are beginning to look at their core competencies.

This notion of a capability is really an extension of the concept of competency. It says that a capability is a combination of elements that improves the performance of your organization along a particular dimension. (Dimensions can be speed, cost, quality, whatever is important to your operation.)

The key point is that a capability is not necessarily one element. It's not a magic system. It's not superhuman people in your organization. It's a combination of the human skills, the organizational procedures or processes, the physical assets that you have in your possession and the information systems that you have developed. It's an integration of all those pieces to produce a unique capability— and the capability could be to respond to requests in one day versus one month—something that you can do better than anybody else.

A capability can be to react quickly. A capability can be an organizational structure that reduces cost over time, continuously improves itself, and can improve quality. Basically, you're increasing your entire organization's productivity by putting together this combination of elements that produce a capability. And they, in fact, become your organizational assets. They become the things that you're going to manage.

This is a fairly new concept and there's quite a bit being written on it. I think that, at least in the private sector where people are beginning to realize that all products look alike and everyone can serve the same markets, they're looking for those unique things that distinguish them from their competitors.

An example of a capability is something called internal integration, which is the ability to develop and deliver your products and services more efficiently. This capability is a combination of elements. It allows you to accelerate, and reduce the cost of, an investment process.

Instead of saying "investment process", let's say "service". Let's say you're in the process of producing new services to your constituents. Do you have the ability to accelerate the development of new services and reduce the cost of that development because you have an internally integrated organization? That requires cross-functional interaction between the parts of your organization. It also requires a process orientation.

If you can do that, you're going to have two results. First, you're going to be more cost-effective. You're going to have a cost advantage. In the private sector you can look at that as a way to increase your market or your profit share, and you're going to have a significant cost advantage if you do that. You're also going to have speed. You're going to be able to respond more quickly to the demands of your customers.

The reason I'm bringing this up in terms of information technology is that information management is a key part of cross-functional integration. You've got to be able to share information in order to make this work. So, this is an example of developing a capability, using information technology. In fact, information is one of the leverage points.

I'm going to go into something that's fairly complex, and the point I want to make is that one of the key elements of effectively making investments in technology is to assure that there is an alignment between those investments and the objectives of your organization.

To achieve alignment, according to a model developed in MIT in 1989, you have four areas where you can make choices. You have a business strategy. You have an organizational infrastructure and your processes. You also have an IT strategy, and an IT infrastructure and processes. You make choices about your strategy for your organization and you can make choices about your infrastructure— in other words, how you organize and your processes. You can also make choices about your IT strategy, as well as your IT infrastructure, your architecture and your processes.

The real strategy behind alignment is to ensure that the decisions you make in any one place are connected to the other things that you're doing, so that your business strategy and your IT strategy are aligned; that you can explicitly look at your strategy for technology and understand why every element of that strategy is there in respect of what your business objectives are; that you can look at your organizational infrastructure and your processes, and you can say that those processes are driving directly to help you meet your business strategy.

Within business strategy there are three elements: there's the scope, which says what you do and why you are in business; there are the distinctive competencies, which are the things that you have to be good at to be successful; and there is business governance, or the other organizations you have to relate to in order to deliver your products or services to your customers. You have the infrastructure, your organization, and your business processes.

You need to ask, "What kind of people do I need to make this thing really work and what kind of skills do they have to have?" As we said earlier, you've got plenty of technology to pick from. Which types are most appropriate to help you meet your business mission? What do those systems have to do? What are their systemic competencies? What do they have to be capable of doing in order for you to meet your business strategy? And finally, how are you going to get those capabilities? As Andy said, we all have limited budgets. What kind of partnerships are we going to develop to provide those capabilities?

That, in fact, is an IT strategy element. Of course, the IT infrastructure and processes are fairly straightforward. You have an infrastructure: your architecture, hardware, software, networking to applications. You've got a set of processes: processes to develop systems, processes to support your customers. Then you've got a set of skill requirements that you need to have in your IS organization to be able to deliver all this. Strategic alignment says that we need to look at all the areas and make sure that, when we make a decision on one, we understand the implications in the others.

The last thing I want to talk about in terms of looking at IT value is something that we came across rather recently, and that's something called option value. In many cases, organizations were struggling with some of their infrastructure investments, trying to figure out how to determine which infrastructure investments to make, and to understand the value of those investments.

Very often, infrastructure investments don't give a payback very quickly. They are positioning the organization for future growth, future efficiencies, future cost reductions. And so, people consider the investment of information technology as an option, and look at it in terms of the options that investment will give them for the future. So, the definition of an option is the ability, but not the obligation, to take advantage of opportunities available at a later date—and the key here is, that would not have been possible without the earlier investment. In other words, if I don't make that first investment in infrastructure, then I won't be able to make future investments.

We've seen this used in many cases where organizations are looking at building networks, shared databases, electronic mail systems—anything that is the roads and bridges of the information highway, which often doesn't have an immediate payback. It's most prevalent when we cross departments for things that each department, alone, can't justify, and which have an effect on the overall organization.

You could look at an option as a decision tree. If you're on one side, the question you're asking yourself is, "Should I invest in this new network or not?" Those are the first two selections that you have. The real issue here is not the immediate payback of having that network. The real issue is which future scenarios have the most value to you, because this is an evolutionary process over time.

If, say, network-dependent scenarios are the best scenarios in terms of value to my organization, then clearly I need to make that investment even to execute those scenarios. Now things change over time and I'm looking forward here. Where do I need to go and what are the steps that I need to take? And I must recognize that the value of an initial investment isn't necessarily the immediate payback I get, it's the value of the future options it allows me to entertain.

One or two years ago, Kaplan and Norton wrote an article, for Harvard Business Review , about the notion of a balanced scorecard—that we have to look at more than just a financial perspective when we make investments, which really asks how we look to our shareholders, our constituents. How do our customers see us? In other words, when they come in and use our services, how do they perceive us?

We also want to have an internal business perspective: what do we have to be really good at? What do our processes have to look like for an effective organization?

Finally, there is something they described as an innovation and learning perspective, and that is: what do we have to have in place to be able to continue to improve and create value? What elements of our organization, our people, our skill sets, do we need to have in place?

What they're suggesting is that, as business managers, we need to have multiple perspectives when we make investment decisions. We don't want to be focussed only on a financial perspective because the other dimensions are important as well.

They give an example of how that may be applied. There's a concept called information economics, which suggests that what you want to do when you look at investments in technology—or any investments, for that matter—is to establish a set of criteria and to assign a weighing factor to say how important those criteria are. Now you have a tool that you can use to score each investment that you would like to make.

We all have more on our list than we can afford to fund. So, the question is which ones are most important to us. Many organizations have applied this as a simple filtering technique.

The interesting thing is that, within the business objectives, there are multiple objectives. The first is an economic cost impact, the second is strategic business direction, and the third is competitive advantage. What's interesting as well is the weighing factor. That economic cost impact is not an 80 per cent waiting factor, it's 25 per cent. Strategic business direction is 20 per cent. So, we have a much more balanced perspective on how we're going to make decisions.

Along with that we have a set of risks, which give you a negative approach. You would take each of your IT projects, or investment initiatives, and score it against each of those criteria, times the weighing factor, to get an overall score. That will give a first-level filtering as to which investments are most important, at least today, versus the ones that are less important. Recognize that this is a dynamic list. You may change it, depending on the specific situations or conditions in your organization.

Before I discuss IS organization, let me summarize this whole notion of assessing IT investments. I think that first, and foremost, is alignment. I think it's critical, today, to look at your IT investments as they are aligned to your business objectives. You can no longer put that on the side or do it after the fact. They have to be considered together because we recognize that business decisions and business directions have a direct impact on IT investments, and there very well may be IT investments in IT that could have a direct impact on how you choose to run your organizations. So, you need to be conscious of both those things.

I mentioned strategic capabilities. As we look at those unique combinations of things that make our processes efficient and effective, we need to look at how information technology can support that as an enabler.

Third is a point that says we need to look beyond simple financial measures for our investment criteria. We need to be creative and look at the other impacts of those investments on our organizations.

And finally, when we look at our investments, we need to have a matrix. We can't have only a cost perspective because we are building for the future as well.

Let me discuss the IS organization. I think we're seeing a changing role here, along with the idea of investments, especially in the public sector. The old role was that we were really supporting the services of the government through our computer operations and our network services. Maybe you're beyond this already, but in many cases, the people that I've talked to have looked at themselves strictly as a service organization.

We're beginning to see that they have a new role. They can be part of the leadership that is driving re-engineering because, although the process owner, as Andy said, ultimately has to own this thing, the technology people can help look at what role technology can play to improve those business processes. How can technology enable changes? How can we do things differently?

An example of that was early this year. We visited the City of Phoenix, which, I think, has a pretty progressive MIS organization. They said they have really instituted a dramatic change. Their past orientation was, as an MIS organization, what they called "point in time". In other words, "I have a requirement. It's time to develop the system." To support the City departments, they got a long list of projects and attempted to do as many of them as they could. So, they were really a reactive organization.

What they've done, fundamentally, is to become more of a pro-active organization. They view themselves as the owners of the information infrastructure. Their objective is to develop this information infrastructure to support the critical processes for the entire City Government across 23 departments. They have become the glue, if you will, that is pulling together this whole organization and attempting to make it more efficient than it was in the past.

From some work that we've done at the Ernst & Young Centre for Information Technology and Strategy comes a picture of the IT process, or the process that IS organizations would have. There are two basic areas. You not only have the process of ongoing business support, which you may look at as an expense and which involves the IT operations and customer support, but you also have a responsibility in creating business value and making the appropriate investments to make the organization successful. That means to look at business opportunities that are enabled by technology.

I can include in there the process re-engineering efforts, that you have a responsibility of stewardship for the infrastructure, as in the City of Phoenix, who themselves are building that information infrastructure. Then you have a responsibility for selecting and delivering those components because business organizations are business organizations. They would like to look at this as a service. (One idea is to look at this as a telephone. I buy a set and I plug it in and I get everything I need. Maybe that's where we're headed.) Along with that, we have an overarching responsibility for the management and the development of strategy.

Let me conclude with a new matrix that you could use for your IS organization. You'll see that this is really taking that balanced scorecard I referred to earlier and applying it to the IS organization.

There are really four views. We have a business contribution view, as an IS organization. How do we look to our senior management, to the people that own our budgets? And then we have to have a customer, or user view. How do our customers or users—the people who are actually having to use these systems—see us? Then we have an internal performance view, which asks, how our execution compares to industry standards. Are we a world class IS organization? Do we match other IS organizations in similar businesses? And finally, have we built an organization that can constantly improve and meet tomorrow's challenge? What, in fact, is our growth and learning view?

What we're seeing here is that IS organizations are moving beyond the idea that they are simply service organizations that respond to requests from the business. We are an integral part of the business and we have multiple things to look at in terms of measuring our capabilities and our competence.

Peter Greis

Q Do you have any suggestions on measures? How can we put in place feedback mechanisms so that we're constantly knowing how to steer the ship in terms of keeping the alignment and whether we're getting the paybacks we're looking for?

Peter Greis

Once you determine what your business measures are for your organization, then you can step back and say, "Okay, what investments do I have to make to maximize those?" So, it becomes an indirect relationship.

You need to understand what determines customer satisfaction. What are the key criteria? Response time? Accuracy? Whatever it is, a set of criteria makes it up. Then, how can I improve? Let's say it's an accuracy issue. Can I employ technology somewhere to improve that accuracy because I know that relates to customer satisfaction, which is my business objective?

I think you have to build a model of your business, then list the buttons you need to push or the dials you need to turn, and then look at your investments in terms of how those investments can improve those metrics. In short, I think every organization needs to understand those buttons and dials that you need to manipulate to be successful, and employ your investments that way.

Q I'm just wondering about putting a value on information in terms of improving decision making— the value that it has to senior managers. Do you consider putting a dollar value on timely, accurate information at all?

Peter Greis

An airline gave me an example. When Eastern Airlines went bankrupt, there were a lot of assets for sale. The fact that we were unable to have the appropriate information to make decisions immediately about which assets they wanted to purchase meant that they missed opportunities. They didn't know until after the fact, when they looked at who bought what assets, what they paid, and what they did with them. The point is that they went back and looked at that, and they decided to put in, as one of their decision criteria, more information for senior management. It's not a rigorous way to look at things, but at least you can do some analysis to see how you could have improved previous decisions with information.